Dichotomy of PTO Front-End Costs and Back-End Revenues

One of the issues identified by the General Accounting Office was the dichotomy of front-end costs and back-end revenues at the PTO. The participants at the customer sessions provided a wide variety of reactions to this issue, ranging from minimal concern to creative proposals that would address the issue.

The majority of comments provided by session participants support the existing dichotomy. It was stated that the dichotomy issue reflects commercial reality; there are up-front costs associated with any investment or business. Additionally, the low front-end fee amounts provide maximum access to the patent system, especially to small entities and individual inventors. Low front-end fees allow both small and large entities to file marginal in-house inventions that may not have been filed with higher front-end fees.

Many of the same participants stated that an increase in front-end fees would not support the PTO's constitutional mandate to "promote the progress of science and useful arts" and would directly contradict the PTO's goal of allowing access to the patent system. Increasing front-end fees would minimize the economic benefit received from the disclosure of information by discouraging filings. Instead of increasing front-end fees, it was proposed that the PTO charge fees when the value of the patent is received, which is upon issue and throughout the patent's life.

There were some session participants who opposed the current fee structure, especially maintenance fees. These customers feel that the patent fee schedule places a burden on potential applicants, especially when maintenance fees are taken into account. It was suggested that the PTO eliminate maintenance fees and recoup the lost income through diverted fee income, appropriations from the general treasury fund, or from royalties on successful patents.

A number of session participants do not view patent fees as impediments to their participation in the patent system. When considering the total cost of processing a patent application, including attorney costs, many concluded that PTO fees are reasonable. However, not all participants shared that view, especially those who funded their own research and patenting efforts outside of a corporate setting.

Several proposals were raised which would recover a higher percentage of costs prior to issuance of a patent. These proposals included:

• Increasing filing and issue fees and decreasing maintenance fees in order to provide the equivalent of a cash discount to customers;
• Imposing fees when costs are incurred, similar to law firms' billable hours systems; and
• Implementing an EPO-like system in order to decrease filing fees and charge for patent examination.

Also provided by session participants were methods of modifying the current maintenance fee system to generate additional revenue, thus minimizing front-end fees:

• Allow patent owners to pay all maintenance fees shortly after issuance at a discounted rate;
• Eliminate maintenance fees, as the fees impose a high burden upon patent owners;
• Establish maintenance fees for design patents to offset design examination costs; and
• Base maintenance fees on the societal or financial value of the patent (i.e., royalty system).
  

Successful Applicants Pay a Larger Share of Costs than Unsuccessful Applicants

Most customers seemed aware that the current fee structure resulted in subsidization of unsuccessful applicants, and did not have serious objections to this subsidization. Suggestions by many customers would in fact result in a fee structure that further increases the subsidization of unsuccessful applications. These suggestions included adding a 4^th maintenance fee, charging patent owners based on the income derived from their patents (such as a tax on royalties), and charging maintenance fees based on some estimate of the economic value of a patent.

Support for the back-ended fee structure had several bases, which included:

• A desire to continue to encourage filings and accessibility to the patent system, and the belief that increased front-end costs would discourage applications, especially among small entity filers (i.e. individual inventors, entrepreneurs, and start-up companies); and
• A belief that a major purpose of the patent system is to promote disclosure of new technology. Discouraging filings by increasing front-end costs would be counterproductive to this goal.

Reduced Subsidization

For those customers who opposed the current subsidization of applications, suggestions tended to center around:

• A "pay as you go" system;
• An up-front fee approach in which the filing and issue fees would be merged; and
• Billing an unsuccessful applicant for costs incurred up to the point of abandonment.

Under the "pay as you go" approach, the applicant would be charged fees that recovered a greater share of costs at each stage of the process. This proposal was often linked to the concept of a separate search and/or examination, similar to the EPO process. Under the combined filing and issue fee proposal, average fees paid by applicants through examination would be lower because applicants whose applications did not issue would pay higher fee levels than under the current system.

Reasons for decreasing the current level of subsidization for unsuccessful applications centered around:

• The belief that many unsuccessful applications filed are frivolous in nature, and are of little commercial value; and
• The view that low up-front costs encourage frivolous applications, and take away resources for examination of serious applications. Some of these participants did not believe that encouraging filings, in of itself, was beneficial to the patent system.

Concerns With GAO Definition of Unsuccessful Applications, and Impact on Degree of Subsidization

Many customers had a different definition of a successful application than the one found in the GAO report. The GAO report defined a successful application as one that was allowed and issued, without taking into account continuation filings. For customers, a successful application was one that was successfully commercialized. Customers distinguished between abandonment of an application versus abandonment of the invention. If prosecution was continued in a subsequent application, the invention might still be patented and commercialized, and become "successful".

Customers pointed out that when a continuation is filed, while the PTO might not receive an issue fee on the abandoned application, the PTO did receive an additional filing fee, and often incurred much less expense in the second round of examination, especially if the same examiner who had prosecuted the parent application received the continuation application. One customer expressed the opinion that when continuation applications were taken into account, approximately 90 percent of inventions were ultimately allowed. From this standpoint, the subsidization of unsuccessful applicants might be considerably lower.

Fees Do Not Vary by Invention Type, Even Though the Time and Complexity Involved in Examining Applications Can Vary Significantly

Many customers are in agreement and believe the PTO can justify the need for charging a different filing fee based on the complexity of the application. An overwhelming majority believes the task would be burdensome to the current process and create a dissimilar fee schedule across industry lines. Considering the comments received during our customer sessions, complexity factors are full of disparities. Participants believe charging by complexity may lead to a patent system that would not only discourage patent filing, but also add ambiguity to the administrative process.

Charging applicants based on the amount of examiner time used, solicited the largest endorsement. Billable hours or something similar to the way lawyer's bill clients for the time they spend performing searches was most frequently suggested. This method provides an equitable pricing strategy across the board. A point was made that, because some examiners examine faster than others, applicants will still be subjected to paying higher fees. Participants mentioned other possible alternatives in determining complexity factors, which include:

• Charge applicants by the number of pages;
• Define complexity by the number of claims; and
• Charge by technology industry.

Complexity is in the eye of the beholder. Therefore, determination of the factors involved would be subjective in nature. Any changes to the current fee schedule would have to address the subjectivity issue, and provide an equable alternate to all applicants.

Examination Time Can Increase Significantly When the Application is Either Inaccurate or Incomplete

Throughout the customer sessions, the majority of participants stated that applicants would support an increase to the existing surcharge fee to recover the actual cost of processing and storing incomplete applications. The willingness to pay this higher fee was based on the following points:

• All applicants benefit from patent pending status;
• Some applicants purposely file incomplete applications in order to obtain a filing date; and
• Some applicants use the time associated with processing an incomplete application to develop a market for the product before paying patent filing and examination fees.

However, some session participants disagreed with the alternative which would recover costs through an increased surcharge fee. The following reasons for disagreement were discussed:

• 20-year term discourages and penalizes incomplete applications, so increased fees should not be charged;
• PTO should recover its costs through more efficient use of examiner time, not through increased fees;
• A complete application with the same date will be examined before an incomplete application, therefore penalizing the incomplete application; and
• All incomplete patent applications should be sent back to the applicant without any PTO resources expended.
  

PTO's Current Fee Schedule, Ease of Use

Customers provided a broad range of responses regarding the ease of using the current fee schedule, from being very difficult to use to very easy to understand. From the responses provided, the PTO is doing many things that the customers desire and appreciate, such as:

• Mass-mailings of new fee schedules;
• Using different colored paper when new fee schedules are printed; and
• Publishing fee changes in the Federal Register and Official Gazette prior to implementation.

Overall, it appears the fee schedule system is satisfactory and meets the needs of most PTO customers. However, the fee schedule can still be improved by incorporating some suggestions that were provided by the focus session participants. It would be beneficial for both the PTO and customers to simplify and clarify the fee schedule as much as possible, especially in the maintenance fee and petition fee areas This would reduce delays in processing, thereby expediting the handling of the applications. Many participants were hopeful that the review and study of the PTO fee structure will bring about enhancements to future fee schedules. It should be noted that some suggestions, such as simplifying the fee structure, were not always in agreement with other suggestions, such as charging for complexity differences among applications.

Electronic Filing

During the customer sessions customers were generally in favor of moving to a system of filing patent applications electronically. They pointed out many advantages to such a system, including the following:

• Filing applications and amendments would be faster and more accurate;
• Applicants would receive instant confirmation of their submissions;
• Applicants could receive a filing date immediately;
• The chance of the PTO misplacing a submission would be reduced;
• Many practitioners and corporations are already completely electronic, or nearly so; moving to electronic submissions would remove several steps in the process; and
• As the system expands, almost all actions and correspondence could be handled electronically.

Few customers were opposed to an electronic filing system; however, there were several common concerns with such a system, or the transition to it, including the following:

• Privacy issues would have to be settled before the system comes on-line;
• The system should be inexpensive to use, use standard PCs, and accept common file formats;
• Electronic signature issues would have to be settled;
• There should be some contingency plan or backup system in case communication is lost at the PTO, or at the applicant's end;
• If changes are made to the electronic file, a change record would have to be made automatically; and
• Some sole practitioners do not have PCs.
  

New Products or Services

There are three primary outcomes targeted by customer requests for new products and services. The outcomes can be grouped into the following categories: new or greater access to information, new or greater assistance and training, and new or improved processes and operations.

In terms of new or greater access to information, most of the requests are for on-line/electronic products and services. Customers are primarily interested in using the Internet or some other on-line capability to conduct searches and to download PTO information. A list of requests and concerns about products and services includes:

• Patents issued (full text and drawings), file wrappers, and data back to 1791 with search and electronic copy capabilities;
• PTO product catalogue, CD-assist disk information, and PTO forms that are on-line and can be downloaded;
• Automated Patent Search system with greater accessibility;
• Patent lists based on classification, and classification listing with definitions for each class and subclass;
• Trademark pending information;
• Services similar to those offered by the private sector and better search engines;
• E-mail addresses for examiners;
• Electronic status of cases with encryption and sending office actions electronically;
• User group where comments could be left, and comment on the comments of other users; and
• Electronic version of the gene sequence listing that shows up in issued patents.

In terms of assistance and training, customers are looking for government and industry help in utilizing the patent and trademark system to successfully obtain a patent or trademark and to achieve commercial success. A list of requests includes:

• Legal advice that is less expensive than a patent attorney;
• Assistance for a small fee to help with PTDL searching and use of information;
• Special set of examiners to help individual inventors;
• PTO assistance to encourage small inventors to commercialize inventions;
• Software for filing forms;
• Assistance from industry to help out with applicant education programs;
• Course(s) on patent application filing and the system; and
• PTO assistance to help to the small inventor filing and moving through the system.

As for processes and operations, customers are looking for new or improved PTO processes and operations that will satisfy their needs for simplicity, convenience, quality and time savings. A list of requests includes:

• The PTO should have a return address request form made available to allow people to be notified when addresses change;
• Send out maintenance fee bills, six months prior to the fee being due, so that the applicant can have a reminder of the due date;
• Need longer hours at some PTDLs in some states;
• Extend the scope of the PTO, by providing an arbitration system;
• Allow longer term patents;
• Offer satellite links to the PTO and video conferencing;
• Provide expedited examination services; and
• Provide more extensive searches.
  

Other Issues Discussed

Patent Surcharge Fund

The Patent Surcharge Fund was on many session participants' minds, and struck a strong emotional chord. Most sessions opened with a discussion of this issue. Words such as "outrage", "unconscionable", and "disturbing" were used by some participants to express their views on the increasing levels of unappropriated patent fees.

Regardless of whether participants were individual inventors or represented large corporate customers, they found common ground in their opposition to what they viewed as a diversion of their fees by the government. Comments from customers included the following:

• The fees of the PTO are not exorbitant, but a major concern is the amount that is being taken from the PTO;
• Stop allowing the PTO to be milked for general fund money;
• Need to keep all PTO fees at the PTO;
• The fact that Congress is withholding $92 million in 1998 will get a lot more people mad; and
• PTO is under enormous pressure from Congress to increase fee income, this is a big disincentive to inventors.

At the most basic levels, participants indicated that the lack of full appropriations gave the appearance that Congress does not care about the patent system, and the disclosure of new technology.

The term "cash cow" was raised by more than one participant, and the belief was expressed in several sessions that the PTO was viewed by the government as a source of additional revenue for other government operations. One participant was very incensed and seriously suggested that the PTO should fight back on the Surcharge Fund reductions and sue in court.

Another participant noted that the diversion of PTO fee income weakened the US's attempts to create a more favorable international climate for US applicants seeking patent protection abroad. At the same time that the US is encouraging other patent offices to lower their fees (particularly in Europe), it is diverting fees domestically. From the participant's standpoint, when the US is not practicing what it is asking others to do, it only weakens attempts to help US inventors who seek patent protection abroad.

Concerns were also raised regarding the impact of appropriation reductions on the PTO's ability to deliver the level of quality and service provided in the past. Comments received included the following:

• Diversion of PTO fee income will continue to create longer pendency time and hamper the quality of examiner work;
• Give PTO its money back so that they can hire the needed employees to decrease pendency time; and
• Big corporate clients do not care about fee amounts, but they do care about funds being diverted, and getting less quality for their money.

Many participants also felt that it was pointless to pursue changes to the fee structure as long as funds were being diverted from the PTO. The sentiments were summed up by a few of the comments received:

• None of these fee structures will work if money is diverted; and
• This entire effort is for naught unless PTO can protect its bank account.

Participants put forward some clear suggestions for uses of the diverted fee revenues. Most participants wanted the fees to be used to improve what was viewed as deteriorating service and examination, including hiring additional patent examiners, and paying higher salaries in order to retain experienced examiners. Another frequent suggestion was that the patent fees should be lowered.

Although the Omnibus Budget Reconciliation Act (OBRA) and the Patent Surcharge Fund are currently slated to expire after FY 1998, some participants were less than sanguine about whether the expiration of OBRA would stop the diversion of patent fees. One participant asked, "If the Congress allows the PTO to get out from under the surcharge fund, how will that keep Congress from taking the money and depositing it in another government fund?".

Expedited Applications

Many customers indicated they would be willing to pay greater fee amounts to expedite their applications through the examination process. Expedited processing would be an extremely valuable service for some industries. The extra revenue generated from this service could be used to hire additional examiners, so that regular applications would not be adversely impacted in terms of their application's cycle time. It was also suggested that the extra revenue generated could be used to further subsidize small entity applicants.

Customers were concerned that the fee charged for an expedited application would create a two tiered system that would be unfair to smaller entities not able to pay the larger fee amounts. In addition, the concept is thought to be too close to buying examiner time.

It should be noted that not all participants were interested in having their application processing expedited. Some would prefer to be able to have the option to delay examination.

Maintenance fees

During each of the sessions with PTO customers, annual maintenance fees were discussed with mixed results. Comments included:

• Annual maintenance fees would force annual business decisions for all patent owners;

• Annual maintenance fees would be easier to budget for;
  • Administrative costs would increase for PTO and customers; and
  • Patents would potentially expire quicker assuming shorter product life cycles, resulting in a large decline in revenue after years five to eight.

In addition to annual maintenance fees, other general comments regarding PTO maintenance fees included:

• Allow prepayment of maintenance fees at a discounted rate;
• Eliminate the first stage maintenance fee to allow more time for commercialization. Lost revenue could be made up with higher 2^nd and 3^rd stage maintenance fees;
• Notify patent holders of payment due dates prior to the six-month surcharge window;
• Establish maintenance fees for design patents; and
• Eliminate the small entity subsidy for maintenance fees.

Search fees

In all of the customer sessions, there was general consensus that the PTO needs to improve the quality of its searches. The meeting participants felt more comfortable with searches completed by private search firms and the European Patent Office, even considering the higher costs associated with these organizations. Several participants suggested that PTO transition itself to a cognitive search system instead of word search system. Additionally, it was suggested that all applicants need to complete more comprehensive research prior to submitting an application, therefore decreasing their reliance on PTO searches.

In addition to suggestions for higher quality searches, the possibility of the PTO splitting its search and examination functions and establishing a separate examination fee was discussed. There were mixed reactions from the participants:

• Offer a separate filing, exam, and issue fees in order to keep front-end fees low;
• Split search and exam to allow applicants the ability to drop-out of the process without incurring the examination fee;
• Do not change the process, the applicant can perform their own search prior to filing;
• Improve the quality of PTO searches before offering applicants search reports;
• PTO costs and prosecution time would increase;
• The applicant receives no benefit from being charged a search fee and examination fee; and
• EPO is in the process of merging search and examination due to process inefficiencies.

Small entity subsidy

The subject of the current small entity subsidy was discussed at each customer session. There was agreement among most participants that the subsidy promotes access to the patent system, and should remain in place. However, there was also general agreement that the PTO needs to redefine the amount of the subsidy, and qualifications for the subsidy.

The following three ideas emerged from most of the customer sessions:

• Offer a further subsidy to micro-entities and individual inventors. During the discussions, the size of the organization that would receive this increased subsidy ranged anywhere between one and 30 employees;
• Tighten the qualifications for small entities by decreasing the 500 employee threshold to a substantially lower number. This would result in relatively large, established organizations with ample resources paying large entity fees; and
• Increase the fee differential between small and large entities. A suggestion was made to not only increase fees for all large entities, but also establish a macro entity status for very large organizations. It was suggested that macro entities be defined by either number of internal attorneys or the number of R&D staff.

Other issues related to the small entity subsidy were also discussed:

• It was suggested to implement a means test in place of number of employees for determining an applicant's status. This proposal was met by general opposition based primarily on the difficulty of implementing such a system;
• Concern was raised that extremely cheap fees would result in a large number of unusable applications; and
• The small entity subsidy should not apply to issue and maintenance fees.

Non-US Applications

Many customers indicated that patent fees for countries other than the US are much greater than US filing fees. It was suggested that the PTO charge different fee amounts based on the applicant's nationality. Customers also suggested it was unfair that US large entity applicants are subsidizing non-US small entity applicants with the reduced fees. They believe the PTO should be as inexpensive as possible for all US applicants, and a surcharge should be applied to foreign applications.

[PTO staff pointed out that the Paris Convention and GATT legislation both prohibit discrimination in patent fees based on nationality.]

Deposit Accounts

During the sessions with PTO customers, several problems and concerns regarding PTO deposit accounts were raised. These problems included:

• Deposit account statements are difficult to reconcile. It was suggested that statements include the case number (attorney docket number for a case), in addition to the application number;
• PTO's refund process is slow;
• Deposit account statements need to be mailed in a more timely fashion; and
• Money sent to Chicago to replenish deposit accounts may take up to six weeks to appear in the account.

Pre-Grant Publication

There was some concern expressed that with pre-grant publication the PTO is exerting control of an invention from filers due to disclosure of patent application information. Also, the PTO would be charging filers for this disservice. These customers believe secrecy should be preserved or innovation will decrease. Other customers are pleased with the idea of publishing applications.

Discount Fee after Initial Application

Denials of applications can be devastating to new inventors, and could discourage innovation. Therefore, it was suggested that the PTO offer a discounted filing fee for a second or third application as an encouragement to previously denied filers.

Royalty Charges on Successful Inventions

Instead of maintenance fees paid at set times after issuance, it was suggested that royalty fees be assessed and charged after an invention has proved successful. Successful, commercialized patents could support the PTO, and it would give an inventor more time to develop and commercialize an invention.

It would be very difficult, according to customers, to determine patent-based income and patent valuation, and inventors would oppose taxes on patent assessment value.

Inactive Patent Status

Customers proposed a new patent status, an inactive patent. This type of patent could only be elected after issuance. The patent could not be marketed or used commercially while in inactive status (nor could the owner make any attempt to market or commercialize it). Maintenance fees would be set at a lower amount for patents in this status. Once a patent owner decided to begin marketing or commercializing the patent, the status would be changed, and higher maintenance fees would be enforced.

Submarine Patents

The existence and danger of submarine patents was raised at one session. Customers are concerned that this type of patent is not commercialized by owners but used to bring infringement lawsuits against other inventors. This discourages small companies from commercializing products and does not promote the useful arts and sciences.

Appeal Fees

Several issues related to appeal fees were discussed:

• Consolidate the various appeals fees into one appeal fee;
• Increase the appeal fee, because of the costs associated to the PTO; and
• Set appeal fees at an amount greater than continuation fees to encourage refiling and continuations instead of appeals.

Unavoidable Fees

It was suggested that the unavoidable revival fee should be set at a larger amount than the unintentional fee.

Issue Fees

Several customers suggested a structure of combining filing and issues fees. It was believed that this combination fee could be at a lesser amount than the filing and issue fees summed together. Even at this lower amount, there were many oppositions raised to this structure.

• Over 30% of applications do not reach issue stage, therefore applicants would be paying for a service they would not receive; and
• Filers currently enjoy the period of time between filing and issue to market their ideas and determine the true value of their inventions before paying issue fees.

Informal Drawings

The concept of accepting informal drawings at an increased fee was raised. It was assumed that this would give more flexibility to applicants. Opposition to this idea concerned the added cost that would be incurred by the PTO. Informal drawings would result in two examinations, the first with the informal drawings and the second with the resultant formal drawings.

Deferred Examination

A deferred examination would be a service embraced by certain applicants, although not favored by all applicants. It was suggested that a three to six month grace period be offered.

Design Fees

It was questioned why design fees are not charged similarly to other patent applications, and why design patents are not charged maintenance fees. As suggested by customers, this could be a source of income for the PTO.

Patent Attorney Fees

A majority of customers indicated that PTO fees represent a relatively small part of the overall of cost of seeking a patent when compared to attorney fees.

Provisional Applications

Some customers were unsure of the benefits of provisional applications. A concern was raised that if an application had evolved too much from the original provisional application, the earlier filing date would not be rewarded. Other customers were pleased with provisional applications, although they would like to see the grace period extended from 12 months to 24 months, which would allow a more complete invention, and a stronger application with a better chance of success.

Panel Examination

A team of examiners, or a panel, instead of an individual examiner, was a suggestion raised by a customer.

One Claim per Application

Customers did not favor a suggestion to allow only one claim per application filing fee. If this were to occur resultant claims would be unduly narrow.

Petition to Make Special

It was suggested to offer a petition to make special at an elevated fee, because certain customers would be willing to pay a substantial amount for this service.

Petition Fees

There was confusion expressed from a customer on the necessity of paying a petition fee in order to have a petition heard.

Extensions of Time

Session participants did not favor extension of time fees. Some participants did not object to the charge itself, only the amount of the fee, believing the fee is too stiff. Others indicated the charge is unjust. There was a suggestion to install a "refamiliarization fee" in place of an extension of time fee.

Late Fees

A few concerns regarding late fees were raised. It was suggested that if a six month payment window was always enforced, less extensions of time would be necessary. Customers also disagreed with being charged a late fee because there are no extra costs being incurred by the PTO to support the charge.

Post-Grant Review

A participant requested that the PTO offer a post-grant review of examination.

Interference Charge

Fees are not charged for interferences. It was suggested that perhaps there should be a charge because it is a very price insensitive commodity.

Fees for Different Levels of Examination

A few customers suggested offering different levels of examination for different types of patents, at an applicant's request. Other customers disagreed with this suggestion, basing their opinions on the belief that all patent examinations should be as thorough as possible. They suggested a good beginning assumption is that all patents are subject to litigation.

Translation Fees

It was suggested to duplicate some fees from the EPO office, especially translation fees.

PTO Performance

Questions, issues and concerns were raised regarding specific PTO actions and patent processing procedures. Some questions or issues will be addressed or examined by the Fee Study Team. The remaining questions and issues have been forwarded to the responsible PTO personnel.